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Help With Student Loans


Student Loans and Bankruptcy

Student loans are not dischargeable in bankruptcy unless you can show that your loan payment imposes an "undue hardship" on you and your dependents. Non-dischargeable debts are those debts that you cannot totally eliminate when you file for bankruptcy and will have to be paid by you.

It is almost impossible to show an undue hardship unless you are physically unable to work and the chances of your obtaining any type of gainful employment in the future are non-existent.

Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, privately funded student loans are treated the same way that loans funded and guaranteed by the federal government or nonprofit institutions. Prior to the new law, if you had a loan from a private-sector lender that was not guaranteed, it could be discharged under chapter 7. The new law gives these loans the same protection as the guaranteed loans.

If you would like to discharge your student loans under the "undue hardship" exception, you must file a separate motion with the bankruptcy court and then appear before the judge to explain your hardship. This is not an easy task, so if your student loans are the main part of your debt, you would be better off not facing the harshness of bankruptcy as courts are extremely reluctant to discharge student loans.

Consolidating Your Loans Under Chapter 13

Although you may not totally eliminate student loans in bankruptcy, you can consolidate them, with your other bills, in a Chapter 13 proceeding. Under this chapter, you can propose a repayment plan in which to pay your creditors over three to five years. For a Chapter 13 bankruptcy, you'll need a stable income with disposable income and must have no more than $1,081,400 in secured debt (debt involving property that your creditor might take if you don't make your payments) and $360,000 in unsecured debt. These amounts are adjusted periodically to reflect changes in the consumer price index. Chapter 13 will also stop collection actions taken against you.

If you include your student loans in a Chapter 13 repayment plan, depending on certain factors such as the size of the loan, the number and amount of your other debts, and the amount of your disposable income, you might be able to make a dent in the loan balance over the life of your plan. if the student loan debt is long term (longer than the life of your plan), you may be able to pay the debt directly.  The student loan debt would not receive any distribution from the bankruptcy estate.  You will still owe whatever student loan debt remains when you complete your plan.

Challenging the Loan Balance

Often, a student loan has been transferred between lenders many times, and it's not clear just how much is owed or whether any charges in addition to the principal amount of the loan are in accordance with law.

In a Chapter 13 bankruptcy, you can use an objection to the claim of the holder of a student loan to get a court's determination of your rights. Once a judge decides what is properly owed, the bankruptcy court decision is binding on the lender even if the repayment period on the loan stretches beyond the end of the bankruptcy plan.

Government Collection Procedures on Defaulted Student Loans

The Higher Education Technical Amendments of 1991 (HEA) eliminated all statutes of limitations for any collection action by a school, guaranty agency, or the United States under a federal loan program. The amendments also eliminated all limitation periods for tax intercepts, wage garnishments, and other collection efforts.

If you're not able to discharge your student loans in bankruptcy or establish a repayment plan in a Chapter 13 proceeding, the federal Department of Education has the right to:

  • Tack collection fees of 25% and collection agency "commission" fees of approximately 28% onto the principal, interest and penalties you already owe

  • Take your federal income tax refund until all your defaulted student loans have been paid

  • Garnish up to 15 percent of your wages, without suing you first

  • Take as much as $750 per month (up to 15 percent of your income) in federal benefits to which you might be entitled, including social security retirement and social security disability income, and apply that amount toward your outstanding defaulted student loan debt

  • Sue you for your outstanding student loan debt and place liens on your property

Repayment Alternatives

Depending on how far in default you are on your student loan payments, you may be able to:

  • Work out a repayment plan with the student loan lender that stretches payments out over a longer period or calls for graduated payments that increase as your earning potential increases

  • Get the lender to agree to defer repayment until your career and financial circumstances have improved

  • Consolidate all your student loans into one loan that spreads the payments over a longer period of time, often at lower interest rates

However you decide to deal with your mounting student loans, it's best to tackle the problem as soon as possible to avoid paying more in the long run

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What about getting new student loans?

If you are in "default" on your student loans, you most likely will not get another student loan until you are out of "default" status. If you are in default, you probably already know this. That is the key is whether or not you are in "default".

If you are not in default and if you can qualify for more student loans you can still get more student loans even if you have filed bankruptcy. Section 525 of Title 11 of the United States Code makes it illegal for you to be denied a student loan just because you have filed bankruptcy. This is powerful.

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What Should I Do?

Your first order of priority is to discuss your situation with an experienced professional that deals with this type of situation on a daily basis. You need to talk with a professional that can protect you and who has the answers that you need.... to move on and past this negative time in life.

The Law Offices of Steven P. Taylor has handled thousands of  cases for people in similar situations. We know what to do and how to do it. We can use Federal Laws to get you fast protection.

There is only one big problem! We can't help you, if we don't know you. You need to call us for a FREE Confidential appointment. Things will not get any better by themselves. Come on in and talk to us.

Call our offices now and get the paperwork started.

Call toll free 1-800-966-8447

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Student Loans

As stated, student loans are not dischargeable in bankruptcy. There are, however, several options to help borrowers with defaulted student loans. The following is just an introduction to this topic, and only meant to point you in the right direction.

I. Loan Cancellation:

These types of federal remedies are available to you even if your student loan is not in default. Keep in mind, however, that not all types of loans are eligible for cancellation. To find out what type of loan you have, contact the National Student Loan Data System at 1-800-4-FED-AID, or online at http://www.nslds.ed.gov/.

The following are the main federal programs for student loan cancellation: Forms can be downloaded from (http://www.ed.gov/offices/OSFAP/DCS/loan.cancellation.discharge.html).

  1. Closed School: Applies to Direct Loans, Perkins Loans and FFELs. You must have been enrolled in school at the time of closure. If you withdrew, the withdrawal had to occur within 90 days of the closure.  

  2. False Certification: Applies to FFELs and Direct Loans, but not Perkins Loans. To qualify, you must show that you were not able to meet eligible state requirements for the job you were training for, or that the school altered or forged loan or check documents. This type of discharge applies only to loans received on or after January 1, 1986.

  3. Total and Permanent Disability: This type of discharge applies to FFELs, Direct Loan and Perkins Loan. You must be found totally and completely disabled to be eligible for this type of discharge, and must provide documentation from a physician that you are unable to work because of an illness or injury that is expected to continue indefinitely or result in death. This type of discharge is not available to you if the condition existed at the time the loan was made. However, under new rules, pre-existing conditions may qualify if you suffered substantial deterioration after the loan was granted.

  4. Unpaid Refund Discharge: As part of the 1998 Higher Education Act, this discharge will allow you, if you borrowed after January 1, 1986, to discharge the amount of the loan to the extent of the amount of refund owed to you, which the school failed to reimburse. Included in this discharge are reimbursements of tax refunds seized by the IRS in repayment of the student loan debt to the extent of a refund the school owed you, but never paid.

II. Repayment Options:

Even if you do not qualify for a loan cancellation, there are still some strategies to explore in dealing with defaulted student loans.

  1. Loan Consolidation: This program allows those who do not qualify for a loan cancellation to consolidate their defaulted loans into a Federal Direct Consolidation Loan with an Income Contingent Repayment Plan (http://www.ed.gov/directloan).

  2. Deferments and Forbearances: You may qualify for either a deferment or forbearance even if the loan is in default. The main types of deferments are: student deferments; unemployment deferments, and economic hardship deferments. However, keep in mind that deferments may not exceed a three year time period. Forbearances are available even when the loan is in default, but the interest continues to accrue during the forbearance period.

III. Offset of Federal Benefits:

Finally, borrowers whose student loans are in default often inquire as to whether their Social Security Benefits can be taken by the government in repayment of defaulted student loans. Under the 1996 law, the federal government can take benefits from Social Security Retirement and Disability Benefits, Certain Railroad Retirement Benefits, and Black Lung Part B Benefits. However, keep in mind that there are limits on the funds that the government can take, and that the borrower can fight back. You must receive notice of a hearing before any of your benefits are taken.

If you owe on a defaulted student loan, your hearing will be with the Department of Education. At the hearing, you can either challenge the offset, or set up a repayment plan prior to having your benefits seized. To find out about your rights and options, contact the ombudsman's web site online at (https://studentaid.ed.gov/repay-loans/disputes/prepare/contact-ombudsman/).

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